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PUBLIC POWER AGENCY MEETING MINUTES
August 2, 2007 at 4:00 p.m.
Members Present: John Montone, Chairperson, Timothy C. Lattimore, Luke Rybarczyk, William Graney, Vijay Mital, Mike Luksa , and Dennis Zach
Members Absent: Krste Biljanoski
Staff Present: Lisa Green, City Comptroller, Michael Long, Anthony DeCaro and Andy Fusco, Esq.
One vacant position
Meeting of the Public Power Agency was called to order by Chairperson John Montone at 4:00 p.m. on July 10, 2007. Motion to approve the minutes from the July 10, 2007 meeting made by Luke Rybarczyk and seconded by Dennis Zach and all in favor.
John Montone stated only one thing on agenda, before getting into that would like to have a meeting towards the end of the month because Fluent Energy will be here to talk to the committee.
Meeting on digester. Had a Selection Committee that included Bill Graney, Tim Lattimore, Denny, Mike Long and John to review the three companies that put a Request for Proposal and Qualifications. Worked through the process and feel comfortable with our selection. Proposals reviewed with City Council.
At this point turned over to Bill Cetti. Goals given to us for this project was to eliminate the incinerator losses that were occurring, to lower the City’s energy costs; try to increase return on renewable fuel which is basically the landfill gas, to create an economic development tool and try to build the projects with 100% third party financing. City would provide land and fuel and distance the risk away from taxpayer. Idea to come up with 3 megawatt facility, 2 megawatts for the landfill gas and 1 megawatt with digester. Task before the Selection Committee and the idea was we could transfer risk from the City to the third party that was building and operating. There are 4 types of risk, construction, operations, fuel supply and make up of electricity. What happens in this process is
by out sourcing the building, owning and operating of the facility, you wind up by getting rid of most of your risk, wind up at the bottom which is some loss of control and basically you have an acceptance on oversight on the construction side and on the operating side your risk revolves around your fuel, has been mitigated and not substantial. The City is creating a money machine to make some additional revenues and done in a way that there isn’t much at stake as far as risk factors. Agreement is a simple agreement, basically goes like this, all the electricity and hot water from this project belongs to the City. The repayment to the 3rd party financing is through the purchasing of the electricity, which is done by a kilowatt-hour rate. City owns all the energy and energy attributes, which are green credits and carbon credits that you can sell. There is legislation opinion that might add additional attributes to this pile. The
purchaser owns all the tax benefits that is how they get some of their money. A 15-year deal, the City purchases at the end of the agreement the assets remaining on a general accepted accounting practice basis. Instead of using utility accounting systems which are convoluted this is done just like any other business, and this is suppose to be straight line depreciation, for every year of operation, depreciation is taken. There are going to be some investments potentially made along the way, pitching up our gas coming in because you are building more landfill. The purchaser has all risk except for the fuel supply; at least all the big risks are transferred to the purchaser. The City provides the fuel and the land and the purchaser provides 3 megawatts of power, 24 hours a day, 7 days a week and they are responsible for replacement power when the generator system is not working. In a generator system there usually is some down time, you have to change
filters, change oil, do those things and that runs about 10% of the time. During that time period you still need 3 megawatts of electricity, the purchaser has to provide it. If the generator breaks unexpectedly the purchaser has to provide power in place of it. ONM is a cost managed having actual expenditure level, it is $1 for $1, if wages are $10/hr. and next year they are $10.25/hr., it is only $10.25/hr. paid there is no indexing on this project. Problem in most contracts when you sign with utilities or other companies they tie to the consumer price index and it gets out of control. The other control on the cost is there is an annual budget that has to be put together that is approved by the City. Risk transfers occur in a lot of different areas. Construction area what needs to be done initially before it gets started is step 1, verify the fuel and before any money is spent by the investor the things that will be done is verify the
landfill gas quantity and quality, verify sludge availability quantity and quality. Landfill gas is already being partially verified, quality aspects are in, talk about how to do the quantity. There is a grade cap that can’t exceed that amount, there is exclusive cost to the proposer, the City doesn’t have to pay for construction costs. Waste Management is in there; changes in environmental conditions are there.
On the project construction we go in and do an environmental assessment at the beginning and establish a base line. At the end of the project there is another assessment done and if there is any kind of contamination that requires mitigation or remediation it is the proposer’s cost. Fines and penalties anything associated with construction is the proposer’s. Site maintenance, defects and deficiencies are the proposer’s and the material and equipment quality is proposer’s. The project design is also being controlled with risk management efforts. The City has final approval of design, performance quantities must be provided, if built as designed, must work as designed. Final inspection is there and start up is there, final inspection is done by the City and it has
to accept the project before the project goes to commercial operation. Start up is a phase position we go from final inspection to commercial operation through a series of steps, that gives you a shake down of the equipment and make sure your designs work. Under Project Quality there is a lot of different protections inside the contract, first one is Project Description included in the contract and performance criteria. In final design approval by the City, requires a performance bonding, if we build it as designed, it will perform as designed. Defects, deficiencies, material quality, the commissioning has to be done by the proposer before final inspection is done and commissioning a complete walk through, turning of the valves, checking that everything works as it is built so we don’t have any equipment issues before we do the final inspection. Report sent to the City on the commissioning and then final inspection comes behind to see what has
been mitigated or not mitigated on that report. The start up process is also part of the project quality in that ECOTs got oversight on the project through the whole process to make sure the City gets what they are paying for.
On the operating side there are a lot of different things going on, rate cap as I mentioned, can’t go above that cap without going to Council, so that gives the operating cost a cost control factor. Generator their ability has been established by the three companies that bid, all of them said 90%, which is pretty reasonable in fact it is a little high. All the formulas are transparent, we know how they got to their costs, and we know how the quote came about. We have all the budgets that have to be reviewed by the City. If we run into a fuel shortage on the City side, the way we mitigate that problem is by using natural gas to blend with the fuel for a short period of time or we have them buy electricity, whichever appears to be the cheapest, whichever they do given the type of problem they
face. The City has a right to provide the natural gas either through their contract or drill a well, which there has been some discussion, and bring it from the well. There are quarterly and annual performance reports, there is interconnection and metering meaning that every thing that is coming and going is being measured, so that they we know the buildings are correct. The City has a right to invest in the project with grants and actual cash if you choose to. You can also invest through CREBS that is allowed and there are no penalties of those two types of investments with the exception of cash. The cash has a penalty on a discounted value. The reason these have been put together these guys want to be in this for 15 years and make money so they don’t want you to buy them out, so what they are going to want to do is they are going to try to minimize your investment. Not an unreasonable thing, it is typical in these kinds of business
transactions. The City does have the right to purchase the project outright and there are a couple different ways that can happen. One is lack of performance and there is no penalty, they don’t meet the performance or meet the terms of the agreement. Another might be just a purchase and bankruptcy is the third. Under bankruptcy the City just takes over.
Physical loss, you have to cover with insurance, coverage with the unplanned repair that has to be done in replacement of electricity so if we wind up with the equipment being physically damaged this is what is covering this. On the other we have some of the risk handled through the fact we are going to put in the, originally talked about sludge stabilization equipment, landfill this material, we don’t need to do this under this condition. We can build this project faster than the other way. As a result we pulled that out of the budget, the incinerator will be a backup to the digester in the event something happens. That saves a lot of money and also some discussion about using the facilities at the Wastewater Plant. We have ECOTS oversight from the beginning of this process; we have an
engineering company working of City. The City’s risk really comes down to the fuel and it is not an unmanageable risk. First of all the landfill gas assessments, first risk and what we are trying to do is make sure we get it as good as we can get it. Doing two different engineering evaluations, the City has already paid for one, multiple studies done by B&L are going to be one base line, the second is a confirmation study with another company on quantity and quality of the landfill gas, probably be done in next 30 days. Once we have these numbers we can figure out what the actual commitment we can make, then do design, why we have verification period so we don’t come into a design before we know what the fuel is. Last part even if wrong on landfill gas, we have safety nets underneath this. Likelihood of missing by 100% is 0, you know you have gas, issue we have is how much do we think we are going to miss. Typically on
these kinds of projects the worst miss gives you 90% of what you estimate. Most of the time it runs 95% or higher. We put it at 90% to 95%, you have ways of mitigating that, you have blending of natural gas for one thing that you can and you can buy that or buy replacement electricity which ever is the least cost option. What about the sludge, no body knows much about digesters we know a lot about it, what about quantity and quality during agreement period. If we should have a snow storm and 3 days of delivery can’t be made we can deal with it by using natural gas to make up that quantity or by electricity. We have in storage in the facility about 7 days of material so we shouldn’t have an issue. What if the landfill gas and sludge quantity drops more than that, what happens if you have a supply failure, here is what you have available on the landfill side. If you have no supply available that is making economic sense to
generate, then you can switch to natural gas, but if that doesn’t make sense then what you need to do is purchase the facility and now you have taken out the added cost paid to those individuals and becomes economically feasible to run. You have 30 some years of landfill gas; you have new sections of landfill being developed as that is going down the path that is producing gas. Doesn’t see the landfill gas issue as being a problem. On the sludge side what happens if you no longer can get municipal sludge, the law changes or something else happens. The digester we are putting in allows you to switch feedstock. Other materials in this area that can be used, looked at all organic feedstock inside the county and you will not have a problem getting organic feedstock. The digester can accept municipal wastewater sludge, it will accept manure, food-processing waste, crops from the fields, it will accept grease and oils, and almost anything
that has got reasonable organic characteristics. We think even though you have a risk on the fuel side it isn’t that big of a risk. One question we keep getting is, what if the digester doesn’t work, well if it doesn’t work, it doesn’t matter because what is happening in the front end in the construction we have taken a performance guarantee and the person at risk is the proposer. Likelihood of that happening, not very likely. Companies we are looking at have tremendous amounts of experience overseas, some experience in the US and one has a lot of experience in the US. One is running a facility like this right now; I don’t think we are going to see digester failure.
Tim Lattimore asked at this point to have Lisa Green, City Comptroller to speak about costs. Lisa stated total utility costs at the Sewage Treatment plant is about $1.8 between gas and electric, but saw a proposal the other day and thought the numbers looked reasonable and liked the fact that the City doesn’t have much at risk. Like to see some contracts locked in place for the sludge so that we know we have the fuel that we need. Other than that looks like the City can’t lose. John Montone stated that the costs for electric and gas we will be able to avoid. Mike Luksa asked will our landfill gas run the incinerator totally or is not sufficient, is it easier to run the digester, or does it take less gas or less makeup of methane? Kamyar stated that there is not
sufficient methane gas to run the incinerator that is why you are purchasing gas from the pipeline. The digester actually produces gas, what it does it has incineration that consumes gas, the digester actually takes that same material and makes gas, so between the two of them you create about 2 megawatts worth of natural gas. Mike wanted to know if we are going to use any landfill gas and John stated we would. Andy asked if a projection has been done, let’s say we go to 90% or 85% efficiency and we had to purchase additional fuels to keep up with our obligations to the proposer, has anyone has done a model say at 85% will we be spending more or less than the $1.8 million dollars that we are spending on electric and gas now to incinerate. Bill stated he didn’t believe that comparison was done; intuitively your gas bill is going to be significantly lower than it is today. Your questions asking how much, we really don’t know that. Reason
we haven’t done that we have verification and design clause in there and we don’t know what the landfill gas is so to know what that amount of natural gas difference is, this can be a stopping point on the agreement but the design states if it doesn’t look right we don’t do it. We need to know what the landfill gas is so we know what the design is, whether it is 2 megawatts or 1.9 or 2.1 and then from there we can determine the difference between that. You need to understand all of the risk on the generator is the proposer’s risk and that is where the big outage time is. The proposer is responsible for all the make up electricity, either planned or unplanned failure of their generator, we are only responsible for fuel shortages and we don’t think it will be a huge amount of money on the natural gas side even if we are responsible. What we are looking at right now 5 to 10% of the gas requirements of the LFG, not going to
see that all year round. That is part of the verification and design step in the contract to allow that to happen. Andy asked if the system does better than we anticipated and produces more than 2 kilowatts, what happens then? The way this is set up is that is what we asked for is minimum of bid, they say they are going to run 90% of the time, that is where the price is, 90% of the time we will pay this much for kilowatt, that pays our debt off, if it runs 95% of the time what happens is the amount of electricity produced between 90 and 95% is discounted to the City by 30%. John stated that the excess is going to be utilized by all City equipment and can also tie it to the grid and sell it.
The digester requires that the municipal wastewater sludge is available and Lisa was saying that we would like to see contracts in place so that we know we have the sludge. It depends on how discussions go, it may be practical it may not be practical and the reason is we build digesters for a living and what happens when you go for things where people have their process committed to your future, they usually want to know when it is going to be running, they want a specific date before you can sign a contract. Be it the food processor, be it the sludge provider, be it the guy hauling oil and grease from the restaurants, what they want to know if I can stop paying my tipping fees at the landfill or where ever it is going and I can start bringing it here and they have to deal with contracts to make that happen so they want a
specific time and date, it is too early for that right now. You have enough sludge customers for what you are doing today. What we want to do with this process is to bring more sludge in because that gives you more electricity and it is readily available. The verification process is suppose to identify the quantities and qualities available for this digester. If it turns out to be less than what makes sense, then you don’t do it. Andy asked what the actual out of the pocket costs that the City is exposing itself to by getting this up and running, not the money we are going to save, actual money we have to front? Bill stated out of pocket costs already in the contract. This is for testing of landfill gas; work with staff on quantity and quality of sludge, all soft costs. John stated we have grants for $1.9 and expecting another $500,000 towards this project. The City is not paying any money to any body to build this; out of
pocket cost to the City at this point is only for engineering and soft costs. Andy asked if there are any other municipalities in New York State or northeast that are doing this? Bill stated there are a 100 or so in this state, but they aren’t making gas. They do the same processes. Environmental issues in wastewater area resulted in a lot of digesters being built, they don’t use the gas for generation and what is different about this project the digester is a little more sophisticated because it does a different type of processing. The technology has been around for quite some time. Who you want to talk to is someone who is the using the gas for generation and Akron is one that is doing that. Plant is under construction, not done, but they can talk to you quite a bit about it. John said that Seneca Meadows is taking methane gas and producing electricity. Real issue for the City it is pioneering use of renewable energy from the
sources. John stated the committee felt the City’s benefits far outweigh the risks, benefits are like carbon credits, green credits, and heat far outweigh the risk.
Bill said the selection committee identified some items that were important on proposers, #1 is the risk management issues can we make the risks transferred to the proposers and if their proposals don’t accomplish what we set up in our draft agreements to make that happen have to work with each proposer, interested in a partnering how good a partner are they going to be this is a 15 year marriage, financial capability turns out all three companies are financially capable of doing this project. Related project experience was looked at to see if they actually could do a project of this type, all three have done similar projects. Ability to contract quickly we need to think about because there may have to be some additional processes. That is how the selection was done.
Motion to go into executive session made by Bill Graney and seconded by Mike Luksa. All in favor.
Meeting resumed after executive session. Motion made by Vijay Mital to recommend to City Council to enter into an agreement with C-H Energy Group of Poughkeepsie, New York, for the design, build, own and operation of a electric power generation facility and seconded by Luke Rybarczyk. All in favor.
Motion to adjourn at 5:40 p.m. made by Luke Rybarczyk and seconded by Vijay Mital.
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